I'm seeking an investment method for my Merrill Lynch Edge account since it doesn't accrue interest on cash holdings. Considering this, I opted for SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), purchasing $25,000 worth. However, a few weeks later, I noticed an unrealized loss of $30, which was unexpected. I had assumed BIL would perform similarly to a high-yield savings account, potentially offering around a 5.3% APY. This situation makes me wonder if I should have instead placed my money in a high-yield savings account with Ally Bank or Capital One, where a 5% APY is guaranteed.Is investing in BIL secure? Will it provide returns comparable to current high-yield savings rates?
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1When you say that you have a $30 loss, are you accounting for dividends received monthly? I'm going to guess that this is a case of share price reduction on the ex-dividend date causing a perceived loss. FWIW, another interesting ETF is BOXX which trades Box Spreads in order to earn the rate of return of cash-equivalent money markets. The result is tax deferral and long-term capital gains tax treatment if held for longer than 1 year. If that sounds interesting, do your due diligence first.– Bob BaerkerCommented Apr 6 at 22:06
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2BIL can have a small negative total return over some time periods.– nanomanCommented Apr 7 at 4:18
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1 Answer
Fixed Income ETFs are not fixed-income instruments themselves, in that they do not guarantee a specific return (interest or coupon) and can go up and down in value.
You may have had a $30 drop because 1-3 month interest rates went up slightly (bonds go down in value when interest rates go up; you can do more research online to see why that is). If interest rates go down over time you'll see the value of the ETF go up.
Over the life of the ETF, you should also get roughly the current rate of 1-3 month t-bills in "dividends" which you won't see in your account daily, but as the fund sells bills that it bought at a discount. Bills do not pay interest directly but are sold at a discount - the "interest" is obtained when the bill matures and you get the face value.
So be sure to include the dividends you receive as part of your overall income, not just the price of the ETF.
Will it provide returns comparable to current high-yield savings rates?
Yes it should. The current yield (amount of dividend paid divided by the price) of the ETF looks to be over 5%, though it might be on a lag, meaning you won't see the yield from 3-month t-bills until those 3 months are up. But returns on an ETF are not guaranteed. If interest rates go up significantly, the value of the ETF will go down as described above, though you'll see a higher dividend in that case.
